Whether intentionally or unintentionally, it’s likely that at some point an employee will pay for an expense out of pocket. It could be something as small as a coffee with a client or as large as travel expenses for an out-of-city convention.
When this happens, it’s important to square things up, reimburse the employee, and get that expense properly recorded in your records. But it’s not as simple as giving them cash, there’s a verification process that needs to be followed.
This is where expense claims come into play. If you understand what they are, how to process them, and how to keep them in check, you can manage employee reimbursements with ease and at scale.
What is an expense claim?
An expense claim is a request submitted by an employee for reimbursement on a business-related expense they paid for out of pocket.
When a business expense isn’t processed on a corporate card or through the typical purchasing channels, the employee floats the cost until an expense claim is processed and the employee is paid back.
Expense claims are often submitted as part of an expense report. Expense reports are documents that itemize all of the expenses incurred over a period of time, filed with supporting receipts and documents.
Individual claims or expense reports go through an approval process with the finance team before reimbursements are paid out.
Key aspects of an expense claim
Expense claims may look different from business to business, but they generally share these key aspects.
Purpose
The main purpose of an expense claim is to ensure employees are reimbursed for any money paid out of pocket for business expenses. By reimbursing the expense and recording it on the books, businesses can claim these expenses as tax-deductible (if eligible).
Expense claims are a necessary part of the bookkeeping, budgeting, and tax reporting processes. They show spending patterns, keep financial records up to date, and ensure the business is maximizing its tax deductions at year's end.
Process
The specifics of an expense claim process vary based on the company's size and software. Generally speaking, expense claims follow a consistent sequence of incurring an expense, collecting documentation, submitting a claim, a claim approval process, and reimbursement being processed.
Software can expedite this process with automations, including optical character recognition (OCR) to scan documents, approval workflows, and updated reports when integrated with accounting software.
Details required
A valid expense claim needs to have enough information for the finance team to confirm what was purchased, when it was purchased, and where it was purchased from. With this information, they can confirm if the expense was valid and eligible for reimbursement.
The standard details required for an expense claim are:
- Date of the expense
- Vendor or supplier name
- Amount paid
- Business purpose
- Expense category
- Receipt or other supporting document
- Employee name and department
What are common types of expense claims?
Many business expenses can be paid for by an employee out of pocket, but these are the most common types of expense claims you’ll likely face in your operations.
Travel
One of the most frequent sources of employee expense claims is travel-related expenses. This includes airfare, transit costs, hotel costs, rental cars, parking, and rideshares. See our guide for detailed information on travel expense reimbursement.
If an employee uses their own vehicle for travel, they may be eligible for mileage reimbursements. Instead of logging individual costs, employees are paid a standard rate set by the IRS for every mile travelled.
Meals and entertainment
Business meals cover everything from grabbing a working lunch with a colleague to a client dinner. But the rules and regulations surrounding business meals require clear documentation of who was present and the business context of the meal.
Entertainment expenses have similar rules, though they are more heavily scrutinized by the IRS. You may want your reimbursement policy to include pre-approval for entertainment expenses to ensure they are eligible before they are incurred.
Office and work supplies
Some employees may cover small office supply purchases like printer ink, notebooks, or paper out of pocket as the need arises. These are commonly claimable expenses, especially for remote workers who are covering home office expenses (depending on the company’s policy).
Training and professional development
Any training and educational materials that are relevant to an employee’s role or career progression that employees may be claimed. However, some businesses require pre-approval before the expense is incurred to ensure it’s for developing a skill that the business wants to invest in.
How does the expense claim process work?
The expense claim process generally covers a basic, five-step process.
1. An expense is incurred
The expense claim process starts when an employee pays for a business expense using personal funds. It could be a planned expense or something that happens spontaneously, like buying the team lunch for a brainstorming session. Regardless of how it comes up, this is when the employee is responsible for starting the process.
2. Document the expense
The employee is responsible for documenting the expense, including a valid receipt or proof of purchase. Any supporting document should include the date, vendor, amount, and business purpose.
Physical receipts can easily be documented by taking a photo. Digital purchases can be documented with an email confirmation or an emailed receipt.
3. Submit the expense report
The employees compile their documented expenses into an expense report, attaching receipts and categorizing each line item. Once the expense report is submitted, it goes through the business’s financial team for approval.
Depending on the business’s infrastructure, this may be done through an expense management platform, filling out a spreadsheet, or providing a paper report.
Timeliness is key. Many business expense policies have a window of eligibility, and if an expense was incurred outside of the window, the expense claim is denied.
4. Approval
The approval process may involve managers, team leads, and finance teams to review the submitted claim and verify the costs as legitimate. This may be done with a tiered approval process, going through a direct manager first before going through the finance team.
The claim and supporting documents are checked, and the expense itself is reviewed against the business’s expense policy. The expense claim is then approved, rejected, or sent back to the employee for additional information.
5. Reimbursement
Once approved, the finance team processes the reimbursement, with the payout being done through payroll, bank transfer, or check. The finance team also updates the business’s bookkeeping and accounting to include the expense, updating reporting (like the income statement, where expenses are reported).
What is an example of an expense claim?
To illustrate how an expense claim works in practice, let’s walk through an example of an employee traveling to a convention in another city.
The employee will be in the city from May 4th to the 6th. The first costs incurred will be travel costs, including a $500 round-trip flight and a $400 hotel stay for two nights.
Each day, the employee will be traveling to and from the convention center with a local shuttle service, with a cost of $5 for a day pass.
Once the employee arrives, they need to purchase some simple office supplies for the booth, totaling $50.
On the second night, they have a conversation about a potential partnership that they choose to continue discussing over dinner. At a local restaurant, the employee covers a $70 bill.
When the employee comes back, they compile all the supporting documents and fill out an expense report.
Once the report is submitted, the direct manager reviews each cost against the company policy, validating that each expense was relevant to the trip. If approved, it gets passed on to the finance team for final approval, with the $1,035.00 reimbursement processed on the next payroll cycle.
What expenses qualify for reimbursement?
Two sets of policies determine whether an expense qualifies for reimbursement.
The first is the IRS’s rules on expense reimbursements. The IRS requires that:
- The employer maintains a reimbursement arrangement
- The employer meets the accountable plan requirements, requiring any reimbursements to
- Have a business connection
- Be substantiated with documentation (like a receipt or invoice)
- Not be in excess of the original expense amount, with excess returned to the employer within a reasonable period
- Be submitted within 30 days after travel, and no later than 60 days after incurring the expense
The second set of policies is the business’s own expense policy. The expense policy is the internal rules on what types of expenses and amounts are permissible, and how the reimbursement request can be submitted (including these seven details every expense policy should include).
Commonly accepted categories of reimbursable expenses include:
- Business travel: flights, hotels, grand transportation, and parking
- Client meals: qualifying meals between coworkers or clients
- Office supplies: equipment or supplies needed for work
- Professional development: Training, certifications, and education
- Software: work-related subscriptions or tools
- Home office costs: resources for qualified remote workers
Common challenges in the expense claim process
Even with a clear and refined expense policy, some of these issues can interrupt or slow the process.
Errors in submissions
Any mistakes in an expense report slow down the process, forcing finance teams to follow up with employees for clarification. This could be missing receipts, incorrect amounts, or omitted details on what was purchased.
If not caught in the approval process, these mistakes have knock-on effects on the bookkeeping and tax filing processes.
Use standardized forms or software with automated validation checks to make sure the expense report is completed properly before it lands on someone’s desk for approval.
Delays in approval and reimbursement
Approvals that depend on a single manager or that are only processed in batches on select dates slow down the reimbursement process, leading to employee frustration. It can also lead to cash flow issues if finance teams aren’t keeping a close eye on pending reimbursements. If a batch of reimbursements is higher than expected, they may find themselves scrambling to find the funds.
If you still depend on manual, paper-based expense reports, this will always be a strain on the organization. Look to move to automated workflows that usher expense reports through the necessary stakeholders with automatic reminders.
Misunderstandings about expense policies
If any employees aren’t clear on what can and can’t be claimed, you’ll lose precious time on rejected expense claims. Or, if these requests slip through the cracks, you’ll over reimburse employees for costs that may fall outside of policy.
It’s best practice to have a clearly written expense policy in an easily accessible place, with training sessions on policy updates as they come. Any new employees should also be given training on what can and cannot be reimbursed.
How to streamline expense claims
If you’re still dealing with a slow, frustrating expense claim process, it’s time to make a change. But don’t worry, you don’t need to reinvent the wheel. Implementing each of these best practices bit-by-bit will speed things up:
- Write a clear expense policy: The easier that a policy is to understand, the easier it is to follow. And when employees know what can be reimbursed, you save time on rejected expense claims and the conversations that follow. Make it easy to find and review.
- Simplify receipt capturing: With easy access to cameras, capturing a receipt has never been easier. There are dedicated apps, but you can also set up a shared drive or a dedicated email inbox for supporting documents.
- Use category rules and spending limits: Spending limits make it easy to process an expense claim at a glance. If the expense claimed is above the limit, it’s quickly rejected. If you’re using an expense management platform, it typically comes with the ability to auto-reject anything outside of spending limits.
- Clarify approval workflows and roles: There should never be ambiguity about who an expense report should be run past, or who has the final say on the approval. This workflow can be automated with routing rules.
- Integrate with your accounting software: Having approved claims sync with your accounting software saves you the extra step of creating a transaction and updating the books.
- Learn from your expense claim trends: Understanding what employees are filing expense claims helps you identify when a change can be beneficial. For example, if you’re dealing with a large number of software subscriptions, you could set up a virtual card or P-card for that recurring cost, saving you from the approval process.
If you’re still dealing with frustrating expense claim processes, it may be time to make a bigger change. Switching to an expense management platform can expedite the process, or the implementation of virtual cards could cut out employee reimbursements entirely.
Speed up expense claims with BILL
With the powerful combination of AI-powered tools and flexible cards, BILL Spend & Expense makes it easier to control and categorize every transaction. Whether it’s major expenses or a simple out-of-pocket purchase, it gets processed quickly and easily.
Our mobile app simplifies spend management on the go. Your team can easily capture receipts or manage a virtual card on the go, at any time. Smart policies are enforced with automated tools that reject ineligible reimbursements based on vendor or amount.
Empower employees to spend on what they need with company cards. Each card can be given its own cost controls, so only approved purchases go through, skipping expense claims entirely.
